Use this financial dictionary of loan terms to make sure you get the best deal on your loan and use debt responsibly

Our financial dictionary of loan terms includes over 50 terms and counting. I surveyed loan officers, lenders and other financial bloggers to put together the most comprehensive list of financial terms around lending.


Adjustable rate mortgage (ARM)

An adjustable rate mortgage is a special type of real estate loan with an interest rate that changes over the life of the loan. Unlike fixed-rate loans, where the interest rate is the same until you pay off the mortgage, ARM loans change at one or several points.

The interest rate on an ARM loan is generally lower at first, to persuade people to choose the mortgage, and then resets after three- for five-years. The change to the interest rate is usually dependent on where an interest rate benchmark is at the end of the reset period. This means that rates on an ARM may rise or fall. The amount the rate is allowed to rise or fall is usually capped so payments do not get too far out of hand.

ARMs got a bad name during the housing bubble because people were using them to qualify for higher amounts than they would otherwise on a fixed-rate loan. When the loan rates reset, people couldn’t afford the new payments.


Amortization is loan term to note the repayment of the debt over time. Each monthly loan payment will be partly principal and interest. The amount of principal paid each month is the amortized amount, or the amount of the loan paid off.

Annual percentage rate (APR)

The annual percentage interest rate on a loan, or the true cost of the loan each year. The APR is going to be higher than the nominal rate quoted on the loan because the APR includes up-front fees and is calculated differently. Always make sure you are comparing APRs when looking at different loans.

Borrow up to $35,000 with a personal loan, Check your rate today

Average daily balance

Average daily balance is the most common way credit cards charge interest each month. Your balance owed each day is divided by the number of days in the billing cycle and then multiplied by the interest rate for the monthly interest charged. Making your payment early rather than waiting until the due date will decrease the amount of interest you pay on the card balance.


Balloon mortgage

Balloon mortgages are called so because you make one final ‘balloon’ or large payoff payment at the end of the loan. You make monthly payments as with any loan, usually over a shorter time period like five or ten years. Some loans may only charge interest payments on the loan each month and the balloon payment is the entire loan amount.

Loans with balloon payments usually have extra incentives like lower payments or rates but the lump sum payment at the end can be dangerous. If you can’t make the final balloon payment, which is usually very large, you could default on the loan even after years of payments.

financial dictionary mortgages
Watch those balloon mortgages – a loan term that will pop your financial future!

Buy down

Some mortgage lenders will allow you to make an up-front payment to reduce the payments on your loan. Many times, a buy down is used to get payments for the first few years down to the point where a borrower qualifies for a loan or can make payments. You might pay $6,000 on a $100,000 loan to get a 6% reduction in the interest rate over a period of a few years. Some homebuilders may also offer buy-downs on mortgages as an incentive for purchase.

Know all the important loan terms in this financial dictionary to avoid getting scammed!

Buy Here, Pay Here

Usually a car lot with on-site financing through lenders or self-funded. Buy here, pay here lots promise to accept borrowers with bad credit or no credit at all. Default rates are very high on loans but the lenders still make money because interest rates are so high and car prices are well above the real value.

Many cars are sold multiple times after being repossessed in default. Borrowers should consider a personal loan or other type of peer lending to buy a car from a reputable dealer instead of going to these last-resort dealers.



On variable-rate loans and mortgages with rates that increase like an adjustable rate mortgage (ARM), a cap is the highest level the interest rate can go. It is usually a cap on the amount your rate can increase to on a yearly basis.

Cash Advance

A type of short-term loan, usually from a payday lender and at very high interest rates. The borrower generally writes the lender a check dated up to two weeks into the future when the borrower receives their paycheck. The lender is then paid back by cashing the check.

Cash advances generally charge a fee instead of an interest rate. This fee is usually around $30 for every $100 borrowed. It may not seem like much but can equal as much as 500% on an annual interest basis. Consider a peer to peer loan for a three-year term at a much lower interest rate rather than refinancing cash advances every couple of weeks.


The ceiling is usually a lifetime cap on the interest rate of a loan. While it might limit the interest rate to below what it would be otherwise, most lenders build into the loan documents a clause that says they can add back the interest not charged into the amount owed. While a ceiling on an interest rate may seem like protection for an adjustable-rate loan, it doesn’t really protect you because repayment of the loan is pushed further out.

Closing statement

Also called a HUD1 or settlement, the closing statement itemizes all the costs paid by buyer and seller in a home purchase. Be sure to check your closing statement to make sure all the costs you negotiated are on the settlement correctly.

closing statement loan terms
Closing Statement HUD1 Form – Loan Terms


Credit can mean a couple of different things but is generally the amount of money you have available to borrow through a peer loan or card account. It can also mean a positive cash entry in accounting, as opposed to debit where cash is deducted.

Credit bureau

There are three main credit bureaus; Experian, TransUnion and Equifax that collect credit and loan information on borrowers in a credit report. The credit report is made available to any lenders, employers or other businesses before lending to the borrower. Your credit report will also contain financial history and information like employment, public records, bankruptcies and judgements against you. Your credit report is not allowed to include information like age, race or health records.

Credit limit

Also called a credit line, your credit limit is the maximum you are allowed to borrow on a revolving loan like a credit card. Your credit limit is used to calculate your credit utilization rate, an important factor in your credit score. Exceed your credit limit and you will likely pay additional fees or penalties.

Besides credit cards, a home equity line of credit (HELOC) is also a revolving loan on which you can regularly cash out money. While credit cards are unsecured, a HELOC is secured against your home.

Credit monitoring

A service to track monthly changes on your credit report to prevent identity theft and help improve your credit score. Credit monitoring services also generally include credit counseling and advice on how to manage debt.

Loan terms not only to help you get the best rates but to improve your financial future!

Credit report

Your credit report is the information collected by one of the three credit bureaus and is used to calculate your credit score. Most of your credit report is your history of paying debts, the amount of debt you own and how much credit is available. Besides the right to a free copy of your credit report each year, you are also entitled to see your credit report if you are turned down for a personal loan or a job because of bad credit.

Credit score

Your credit score is a number between 300 to 850 and calculated by the Fair Isaac Credit Organization. It is based off the information in your credit report that lenders use when deciding whether to give you a loan.

The higher your credit score, the better interest rate you will be offered on a loan so it is important to understand your score and how to improve it. Check your credit report at least once a year and it is a good idea to get credit monitoring protection to prevent identity theft.

Credit Score Factors in P2P Lending

The five factors show the influence of each on your credit score. Payment history and the total amount you owe are the biggest factor in getting a credit card or peer loan. It’s tough controlling these other than finding the money to pay off debt.

One factor you can influence is the type of credit you have whether revolving or non-revolving debt. Using a peer to peer loan, which is non-revolving credit because it has a fixed rate and payoff date, can help to improve your credit score when used as a debt consolidation loan to pay off credit card debt.

Follow these 21 Steps to Increase Your Credit Score Fast – I improved my credit score by 140 points!


Someone you owe money to on a loan or other debt is called a creditor. The bank is a creditor on your home mortgage while you are the debtor.


Debit card

A debit card or cash card can be used like credit cards at checkout but is only authorized by the cash amount you have available in the account. Most debit cards can also be used as ATM cards. The Federal Trade Commission requires the bank to give you protection on a lost or stolen debit card but you may still be responsible for up to $500 if you do not report the card immediately.


An obligation to repay money on a loan or other credit. Debts are also called liabilities in accounting.

Debt Consolidation

The process of taking out a new loan to pay off other loans. It’s used mostly to pay off high-interest credit cards and other revolving loans. Lowering the interest rate on your loans helps to lower the monthly payment and make debt more manageable. Debt consolidation can also help borrowers manage their bills by reducing the number of bills that need to be paid each month.

Learn how to use debt consolidation to save money and improve your credit score.


If you fail to make payments on a loan or other debt according to the loan agreement, the loan is in default. The creditor to the loan can repossess any property or assets that were secured with the loan. Defaulting on a loan will also be reported on your credit report and decrease your credit score, making it difficult to get future loans or interest rates you can afford. A default stays on your credit report for between three to ten years.

Discount point

Some mortgage lenders will require an upfront payment of interest before approving a loan. The amount of the payment is set to equal so many percentage points of interest, thereby reducing the interest rate on the loan. It is usually used to lower the monthly payment of the loan enough that the borrower qualifies. Discount points paid on a loan are tax-deductible so don’t forget them when you pay income taxes.


Finance charge

The finance charge is the total amount in interest and fees paid on a loan. It is usually included on loan documents as an annual percentage rate (APR) to show people their true interest rate when adding in different fees and charges. The Truth-in-Lending Act requires a lender to disclose the APR before you agree to a loan.

Fixed-rate mortgage

A fixed-rate mortgage is a loan with equal payments and an interest rate that does not change throughout the life of the loan. While rates may be higher than adjustable-rate mortgages, you will always know what your rate and payments are going to be. Terms for fixed-rate loans tend to be longer from 15 to 30 years.



A guarantor or cosigner agrees to sign a loan with you to help you qualify. It may be needed if you have bad credit or your income does not qualify for the loan. If you default on the loan, the guarantor will be responsible to make payments or their credit score will be ruined as well. Some states require that a guarantor be a resident of the same state and lenders vary on who they will accept as a guarantor.


Home equity line of credit (HELOC)

Sometimes called a line of credit, a HELOC is a revolving credit secured against the value of your home. Your credit line is fixed but you can pay down the balance and borrow up to your maximum. HELOCs usually have variable interest rates so payments are not fixed. If you do not make payments on your HELOC, your house may be repossessed to cover the loan.

home loan terms
Home Loan Terms

A financial dictionary that uses ordinary language and loan terms everyone can understand

Home equity loan

Different from a HELOC, a home equity loan is generally fixed-interest and much like the first mortgage you have on the property. Rather than a loan for the value of the purchase, a home equity loan is usually set against the difference in how much you own on the mortgage and any remaining value. Rates will generally be higher than offered on a first mortgage but lower than on types of personal loans.

Hybrid mortgage

Hybrid mortgages can go by many names but are basically just some combination of fixed-rate mortgages and adjustable-rate loans. The initial interest rate might be fixed for three- to ten-years and then switch to an adjustable rate loan. The rate adjustment could be a one-time change or happen every year though the rate is usually capped at a maximum.

Like other adjustable-rate mortgages, the initial interest rate is usually lower to persuade borrowers to take the risk of higher rates in the future. The lower rate means lower payments and can also help poor credit borrowers qualify for a larger loan. Never forget to honestly look at what your payments will be in the future and how likely it is you’ll be able to afford the loan.



Interest is the cost of a loan or credit card and is the additional money you pay beyond what you borrowed. It is either a fixed-rate or variable depending on the loan agreement. Interest is usually expressed as an annual percentage even though it may be calculated on a daily or monthly basis. Laws require lenders to tell you the annual percentage rate (APR) which is the true interest rate including any fees and charges.

Interest-only mortgage

Interest-only mortgage loans require only interest payments to be paid each month for a set period, usually up to seven years. Payments increase from that point to the loan payoff to cover the principal amount of the loan. Interest-only loans are tempting because they lower payments significantly during the initial period and borrowers can qualify for a higher loan amount. If you are not able to make the higher payments or refinance your loan, you may be forced into default on the loan.


Loan -to-Value Ratio

The loan-to-value (LTV) ratio is the amount you are borrowing divided by the appraised value of the property. It’s usually used in home or car loans. Generally, you will need to pay PMI insurance if paying less than 80% LTV for a home. Lenders may also have maximum amounts they will lend on a LTV basis.


Minimum finance charge

Credit card issuers may charge a minimum fee each billing period even if the interest charges are lower. These minimum finance charges are more common for credit cards to bad credit borrowers that don’t have any other choice. With a minimum finance charge, you may have to pay the minimum even if you pay your bill in full every month.


A mortgage loan is generally used to refer to a purchase on real estate. There are many different types of mortgage terms including fixed- or variable-rate loans as well as different payment terms. Borrowers need to be careful of terms that lower their payment or involve only paying interest over a period. The lower payment or ability to qualify for a larger loan may seem tempting but can force you to get in over your head. When a mortgage is secured against the property, default means you could lose your home in repossession.

Origination fee

The origination fee is the amount charged by the lender to process your loan application. It’s usually a flat percentage of the loan amount. In a loan to purchase property or a car, the origination fee is added to the purchase price for a higher loan amount. In personal loans and other types, the origination fee is subtracted from the amount you receive.


Payday Loans

Payday loans are short-term loans of up to two weeks and secured against a check or automatic debit from your checking account. Most payday loans charge a fee of around $30 per every $100 borrowed. This amounts to interest of up to 500% annually if you have to take out a new loan regularly. The fact that the payday lender charges a fee rather than an interest rate gets them around state regulations on maximum interest rates.

Consider taking out a longer-term peer loan instead of a payday loan. Interest rates can be higher for bad credit borrowers but still a fraction of the rate on payday loans. You can borrow a higher amount to make sure you don’t need to refinance your loan regularly.

P2P Investing

Peer to peer lending is not only changing the way people borrow money but is providing a great new investment as well. Investors can put down as little as $25 in a low and receive monthly interest and principal payments as it’s paid off. Returns are generally between 5% and 12% for loans from 36 to 60 months.

Peer to Peer Lending

Also called p2p lending and peer loans, this is a new type of online loan where investors are matched directly with borrowers. Because there are fewer middleman costs like a bank branch, rates are generally lower than other loans.

Peer loans are unsecured personal loans which means you don’t have to put up collateral like your home or car. The loans are reported on your credit as non-revolving loans because they have fixed-interest rates and a payoff date.

Check your rate on a peer loan – Click for loans up to $35,000 on debt consolidation

financial dictionary peer to peer lending

Periodic interest rate

Also called the nominal rate, the periodic interest rate is the rate quoted by a lender on your loan. It is not the actual interest rate you will pay or the cost of the loan. Laws require all lenders to disclose the annual percentage rate (APR) which is the interest rate plus any fees and charges. The APR helps to compare all loans on one rate without worrying about hidden fees.

Personal Loans

An unsecured loan with a fixed interest rate and payoff date. Personal loans, also called signature loans, are available through peer to peer lending and do not involve collateral like your home or car. Interest rates may be higher than mortgage rates or those on secured loans.


Principal, interest, taxes and insurance (PITI) includes the four parts of a monthly mortgage payment. Lenders use the PITI to calculate how much loan and home you can actually afford. Concentrating only on the principal and interest part of the payments can leave borrowers scrambling to cover taxes and insurance. The recommendation is that you go no higher than 28% of your gross monthly income for PITI.

  • Principal is the amount borrowed on your loan
  • Interest is the finance charge portion of the loan
  • Taxes include real estate taxes levied by the local authority
  • Insurance includes homeowner’s insurance and private mortgage insurance (PMI) if you owe more than 20% of the home’s value


Borrowers seek preapproval for a mortgage from a lender to help them in the negotiating process for a purchase and to better know how much a house they can afford. The lender will look at your credit score and income to make a judgement on the maximum amount it will lend you.

Preapproval involves filling out an application and a verification of income. The process generally takes a couple of weeks or less and may or may not involve a fee. Remember, just because you are approved for a certain size loan, you do not necessarily need to borrow up to that amount. Buy the house you want not the maximum house you can afford.

Prepayment penalty

Some lenders charge a prepayment penalty or a fee of up to 2% of the amount borrowed if you pay the loan off ahead of the scheduled payoff. Not all lenders charge a prepayment fee and almost none charge it in personal loans or peer to peer lending.

Often the lenders charging a prepayment penalty will offer a lower rate because they are able to lock in the rate for the life of the loan. If your loan does not have a prepayment penalty, consider paying a little extra each month to pay it off early and save on interest charges. Most peer lending and p2p loans do not include a prepayment penalty.

Prime rate

The prime rate is used by most lenders as the base for interest rates on other loans, both business and personal loans. You may see this in two ways. First, the lender may advertise their loan rates as prime plus a certain percentage. The lender may also write up your loan as a variable rate with a adjustments based on the prime rate plus a percentage amount.

The Federal Reserve sets the federal funds rate which in turn determines the prime rate. The prime rate is generally 3% above the federal funds rate. The interest rate banks charge above the prime rate usually depends on the size of your loan with larger loans usually paying a higher rate above prime.

loan terms prime rate
Financial Dictionary – Prime Rate


Principal is really just another word for the amount of funds. In a loan, principal is the original amount of the loan or debt. In investing, the principal may be the amount invested or the face value of a bond.

Private mortgage insurance (PMI)

If you pay less than 20% of the purchase price when you buy a home, the lender will generally require payment of a special type of insurance called private mortgage insurance (PMI). The insurance helps to protect the lender against loan default and having to resell the property at close to what is owed on the loan. Premiums for PMI are generally around 0.5% of the loan amount so $500 a year on every $100,000 borrowed.

You pay PMI each month ($500 divided by 12 = $41.67 monthly in the example above) but can stop the payments once your mortgage is paid down to less than 80% of the home’s appraisal value.



Refinancing is paying off an existing loan by taking out a new loan on the same property. It is most common in home mortgages. There are several reasons why you might consider refinancing your mortgage.

  • If interest rates have dropped and the payments on the new loan would be much lower on the same amount of money borrowed
  • Homeowners facing a higher rate on an adjustable rate loan may want to lock in a rate by refinancing
  • Homeowners that have paid down their loan may be able to refinance the home for a higher amount and cash-out the difference

Closing costs on the new loan can reduce the savings on a refinance so make sure you ask the lender to calculate real savings. A refinance may not make sense if you plan on moving within the next few years because of costs.

Reverse mortgage

A reverse mortgage is a special type of loan for homeowners 62 years or older. Borrowers mortgage their home and may receive cash from the loan. No monthly payments are due while the borrower is alive so the reverse mortgage has been seen as a way for homeowners to stay in their home and lower monthly expenses.

There are drawbacks to a reverse mortgage. Interest payments are added to the value of the loan and it must be paid when the borrower dies through a refinance or sale of the property. Home values are deeply discounted in a reverse mortgage with most borrowers only able to use it if they have at least 50% of the house value paid off.

Reverse mortgages are also extremely expensive relative to other mortgages and loans. Most reverse mortgages, also called Home Equity Conversion Mortgages (HECM) are insured by the Federal Housing Administration (FHA).

Revolving credit

Revolving credit is a loan or credit without fixed payments or a fixed payoff date. A revolving credit line generally involves a credit limit with monthly payments and the ability to borrow more as the line is paid down. The most common revolving credit line is through credit cards but Home Equity Lines of Credit (HELOC) are also common.

Interest rates on revolving credit are generally charged on the average daily balance. Understand that revolving credit is seen on your credit report differently than non-revolving credit. Since revolving credit is less certain than other loans with a fixed rate and payments, it will hurt your credit score more than other types of debt. This makes debt consolidation, borrowing on a fixed-rate non-revolving loan to pay off credit cards, a good way to lower payments and improve your credit score.


Secured credit card

A secured credit card is like a debit card because the spending limit is maxed at how much money you have in the linked savings account. The difference is that you can make a monthly payment on the credit card before the money is deducted out of your savings. The secured credit card is also reported on your credit report so helps to build your credit history and credit score.

Secured loan

A secured loan is one where you guarantee the loan against an asset you own like your home or car. If you fail to make payments or default on the loan, the lender may be able to collect the property to repay the loan. Interest rates tend to be lower on secured loans versus unsecured personal loans because the lender has more certainty of getting some money back.

Self-amortizing loan

A self-amortizing loan is one that is paid off on regular installment payments and over a period of time. It’s the most common type of loan with which most borrowers are accustom. Both principal and interest are paid fully with the last payment. The alternative would be something like an interest-only loan where the principal needs to paid at a later date or a loan with a balloon payment at maturity.

Signature Loan

A signature loan, also called a personal loan, is secured by just your signature and no collateral necessary. These loans can also be referred to as p2p loans and peer loans.

Social Lending

Social lending is peer to peer lending for a social project or cause. The loan reason can vary from true social causes to typical loan needs like debt consolidation and medical expenses. Some social lending platforms involve an interest rate while only the principal is repaid on other loans.

Student Loans

Loans taken out for tuition, room & board and other expenses tied to higher education. Federal programs have made student loans less costly compared to other types of loans. The high cost of private, for-profit schools combined with a high dropout rate has ballooned the amount of student debt owed over the past decade.


Teaser rate

Teaser rates are used by credit card companies and on adjustable rate loans to persuade borrowers. Teaser rates on credit cards are generally for the first year while adjustable rate mortgage rates may stay low for three- to five-years. Laws require lenders to disclose the full cost of the loan over both the teaser rate and the regular rate.

The problem with teaser rates is that they may give borrowers a false sense of security. You may be able to pay the loan payments at the lower teaser rate but may not be able to when the rate resets.

Truth-in-Lending Act

The Truth-in-Lending Act of 1968 is a law to protect borrowers from bad loan tactics that hide fees and the real cost of borrowing. It requires that lenders disclose certain information about a loan including a statement of all costs and the comparable interest rate, the annual percentage rate (APR). The act is also called regulation Z.

Your turn! Got a loan term you want added to our financial dictionary? I’m always looking for new works around lending and loans to help people understand debt. Let me know if there was a term missing or you would like to contribute to our financial glossary.

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